UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

(Mark one)

☒   

þQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2017,2018, or

☐   

¨Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ______________ to _____________.

Commission File No. 000-52211


001-34528
(Commission
File Number)

ZAGG INC

(Exact name of registrant as specified in its charter)


Delaware20-2559624
Delaware20-2559624
(State or other jurisdiction of
incorporation or organization)
incorporation)
(I.R.S. Employer

Identification No.)

910 West Legacy Center Drive, Suite 500

Midvale, Utah 84047


910 West Legacy Center Way, Suite 500 Midvale, Utah 84047

(Address of principal executive offices, withincluding zip code)

(801) 263-0699


(801) 263-0699

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:days. Yes þ No .

¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ No

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.






¨ Large Accelerated Filer
☒ 
þ Accelerated Filer
¨ Non-accelerated Filer (do not check if a smaller reporting company)
☐ 
¨ Smaller Reporting Company
¨ Emerging Growth Company
Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act).Yes ¨ No

þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,964,61028,158,918 common shares as of August 1, 2017.

July 31, 2018.





ZAGG INC AND SUBSIDIARIES

FORM 10-Q


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Page
CONTENTSPAGE
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PART I - FINANCIAL INFORMATION

Item 1.Financial Statements.

Item 1. Financial Statements (Unaudited)



ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

  June 30,  December 31, 
  2017  2016 
       
ASSETS   
       
Current assets:   
Cash and cash equivalents $14,330  $11,604 
Accounts receivable, net of allowances of $784 in 2017 and $824 in 2016  72,956   83,835 
Inventories  65,376   72,769 
Prepaid expenses and other current assets  3,717   3,414 
Income tax receivable  1,193   2,814 
Total current assets  157,572   174,436 
         
Property and equipment, net of accumulated depreciation of $21,856 in 2017 and $18,371 in 2016  15,631   17,755 
Goodwill  12,272   12,272 
Intangible assets, net of accumulated amortization of $60,555 in 2017 and $55,298 in 2016  45,327   53,362 
Deferred income tax assets  49,331   50,363 
Other assets  1,541   2,541 
Total assets $281,674  $310,729 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities:        
Accounts payable $62,237  $85,022 
Accrued liabilities  22,798   22,216 
Sales returns liability  27,794   28,373 
Accrued wages and wage related expenses  5,635   6,169 
Deferred revenue  209   273 
Line of credit  30,683   31,307 
Current portion of long-term debt, net of deferred loan costs of $65 in 2017 and 2016  6,185   10,484 
Total current liabilities  155,541   183,844 
         
Noncurrent portion of long-term debt, net of deferred loan costs of $108 in 2017 and $141 in 2016  10,829   9,623 
         
Total liabilities  166,370   193,467 
         
Stockholders' equity:        
Common stock, $0.001 par value; 100,000 shares authorized; 34,047 and 33,840 shares issued in 2017 and 2016, respectively $34  $34 
Additional paid-in capital  94,207   92,782 
Accumulated other comprehensive loss  (1,270)  (2,114)
Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost  (37,637)  (36,145)
Retained earnings  59,970   62,705 
         
Total stockholders' equity  115,304   117,262 
Total liabilities and stockholders' equity $281,674  $310,729 

June 30, 2018December 31, 2017
ASSETS 
Current assets: 
Cash and cash equivalents $18,582 $24,989 
Accounts receivable, net of allowances of $431 and $734 83,990 123,220 
Inventories 69,662 75,046 
Income tax receivable 1,285 — 
Prepaid expenses and other current assets 5,463 4,547 
Total current assets 178,982 227,802 
Property and equipment, net of accumulated depreciation of $14,212 and $12,540 12,532 13,444 
Goodwill 12,272 12,272 
Intangible assets, net of accumulated amortization of $72,253 and $66,639 33,630 39,244 
Deferred income tax assets 23,914 24,403 
Other assets 3,846 3,426 
Total assets $265,176 $320,591 
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities: 
Accounts payable $60,372 $96,472 
Income tax payable — 2,052 
Accrued liabilities 6,838 8,168 
Sales returns liability 34,620 34,536 
Accrued wages and wage related expenses 5,836 5,652 
Deferred revenue — 315 
Current portion of line of credit — 23,475 
Current portion of long-term debt, net of deferred loan costs of $0 and $141— 13,922 
Total current liabilities 107,666 184,592 
Non-current portion of line of credit20,000 — 
Total liabilities 127,666 184,592 
Stockholders' equity: 
Common stock, $0.001 par value; 100,000 shares authorized; 34,423 and 34,104 shares issued 34 34 
Additional paid-in capital94,977 96,145 
Accumulated other comprehensive loss (1,028)(348)
Treasury stock, 6,247 and 6,065 common shares at cost (40,643)(37,637)
Retained earnings 84,170 77,805 
Total stockholders' equity 137,510 135,999 
Total liabilities and stockholders' equity $265,176 $320,591 


See accompanying notes to condensed consolidated financial statements.

1
1


ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

  Three Months Ended  Six Months Ended 
  June 30,
2017
  June 30,
2016
  June 30,
2017
  June 30,
2016
 
             
Net sales $115,227  $99,833  $208,173  $162,266 
Cost of sales  79,403   68,960   143,743   107,664 
Gross profit  35,824   30,873   64,430   54,602 
                 
Operating expenses:                
Advertising and marketing  2,070   2,275   5,076   5,189 
Selling, general and administrative  24,952   24,880   52,006   44,635 
Transaction costs  300   305   515   2,322 
Impairment of intangible asset  -   -   1,959   - 
Amortization of long-lived intangibles  3,005   4,765   6,026   7,511 
Total operating expenses  30,327   32,225   65,582   59,657 
                 
Income (loss) from operations  5,497   (1,352)  (1,152)  (5,055)
                 
Other income (expense):                
Interest expense  (619)  (604)  (1,110)  (792)
Other income (expense)  67   9   48   (191)
Total other expense  (552)  (595)  (1,062)  (983)
                 
Income (loss) before provision for income taxes  4,945   (1,947)  (2,214)  (6,038)
                 
Income tax benefit (provision)  (1,542)  901   (521)  1,703 
                 
Net income (loss) $3,403  $(1,046) $(2,735) $(4,335)
                 
Earnings (Loss) per share:                
Basic earnings (loss) per share $0.12  $(0.04) $(0.10) $(0.16)
Diluted earnings (loss) per share $0.12  $(0.04) $(0.10) $(0.16)

Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Net sales $118,565 $115,227 $230,631 $208,173 
Cost of sales 80,908 79,403 155,381 143,743 
Gross profit 37,657 35,824 75,250 64,430 
Operating expenses: 
Advertising and marketing 2,638 2,070 5,233 5,076 
Selling, general and administrative 27,035 24,952 51,342 52,006 
Transaction costs 18 300 18 515 
Impairment of intangible asset — — — 1,959 
Amortization of intangible assets 2,773 3,005 5,545 6,026 
Total operating expenses 32,464 30,327 62,138 65,582 
Income (loss) from operations 5,193 5,497 13,112 (1,152)
Other income (expense): 
Interest expense (346)(619)(846)(1,110)
Other (expense) income (681)67 (186)48 
Total other expense (1,027)(552)(1,032)(1,062)
Income (loss) before provision for income taxes 4,166 4,945 12,080 (2,214)
Income tax provision (951)(1,542)(1,835)(521)
Net income (loss) $3,215 $3,403 $10,245 $(2,735)
Earnings (loss) per share attributable to stockholders: 
Basic earnings (loss) per share $0.11 $0.12 $0.36 $(0.10)
Diluted earnings (loss) per share $0.11 $0.12 $0.36 $(0.10)


See accompanying notes to condensed consolidated financial statements.

2
2


ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(LOSS)

(in thousands)

(Unaudited)

  Three Months Ended  Six Months Ended 
  June 30,
2017
  June 30,
2016
  June 30,
2017
  June 30,
2016
 
             
Net income (loss) $3,403  $(1,046) $(2,735) $(4,335)
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation (loss) gain  556   (284)  844   35 
                 
Total other comprehensive income (loss)  556   (284)  844   35 
                 
Comprehensive income (loss) $3,959  $(1,330) $(1,891) $(4,300)

Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Net income (loss) $3,215 $3,403 $10,245 $(2,735)
Other comprehensive (loss) gain, net of tax 
Foreign currency translation (loss) gain (970)556 (680)844 
Total other comprehensive (loss) income (970)556 (680)844 
Total comprehensive income (loss) $2,245 $3,959 $9,565 $(1,891)


See accompanying notes to condensed consolidated financial statements.

3
3


ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

  Six Months Ended 
  June 30,
2017
  June 30,
2016
 
Cash flows from operating activities   
Net loss $(2,735) $(4,335)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock-based compensation  1,636   2,291 
Excess tax benefits related to share-based payments  -   (566)
Depreciation and amortization  11,022   14,568 
Loss on disposal of property and equipment  13   - 
Deferred income taxes  1,040   (43)
Amortization of deferred loan costs  120   81 
Impairment of intangible asset  1,959   - 
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable, net  11,350   5,666 
Inventories  8,130   1,104 
Prepaid expenses and other current assets  (298)  1,859 
Other assets  912   (210)
Income taxes receivable  1,622   (1,095)
Accounts payable  (23,116)  (8,506)
Accrued liabilities  1,073   (202)
Accrued wages and wage related expenses  (1,083)  12 
Deferred revenue  (64)  69 
Sales returns liability  (625)  (7,274)
         
Net cash provided by operating activities  10,956   3,419 
         
Cash flows from investing activities        
Purchase of property and equipment (net of amounts acquired)  (3,065)  (4,700)
Proceeds from disposal of equipment  31   - 
Purchase of mophie, net of cash acquired  -   (74,743)
         
Net cash used in investing activities  (3,034)  (79,443)
         
Cash flows from financing activities        
Payment of debt issuance costs  -   (1,144)
Proceeds from revolving credit facility  205,897   142,477 
Payments on revolving credit facility  (206,521)  (92,471)
Proceeds from term loan facility  -   25,000 
Payments on term loan facility  (3,125)  (1,563)
Purchase of treasury stock  (1,492)  - 
Payment of withholdings on restricted stock units  (240)  (621)
Proceeds from exercise of warrants and options  29   54 
Excess tax benefits related to share-based payments  -   566 
         
Net cash provided by (used in) financing activities  (5,452)  72,298 
         
Effect of foreign currency exchange rates on cash equivalents  256   (26)
         
Net increase (decrease) in cash and cash equivalents  2,726   (3,752)
         
Cash and cash equivalents at beginning of the period  11,604   13,002 
         
Cash and cash equivalents at end of the period $14,330  $9,250 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for interest $953  $566 
Cash paid (refunded) during the period for taxes, net $(2,322) $834 

Six Months Ended
June 30, 2018June 30, 2017
Cash flows from operating activities:
Net income (loss)  $10,245 $(2,735)
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Stock-based compensation1,408 1,636 
Depreciation and amortization9,230 11,022 
Deferred income tax expense481 1,040 
Loss on disposal of property and equipment13 
Loss on deferred loan costs with debt modification243 — 
Amortization of deferred loan costs106 120 
Impairment of intangible asset— 1,959 
Changes in operating assets and liabilities:
Accounts receivable, net37,318 11,350 
Inventories5,080 8,130 
Prepaid expenses and other current assets503 (298)
Other assets(563)912 
Accounts payable(34,480)(23,116)
Income tax (payable) receivable (3,512)1,622 
Accrued liabilities(1,404)1,073 
Sales returns liability(5,092)(625)
Accrued wages and wage related expenses153 (1,083)
Deferred revenue— (64)
Other 232 — 
Net cash provided by operating activities 19,957 10,956 
Cash flows from investing activities:
Purchase of property and equipment(2,701)(3,065)
Proceeds from disposal of equipment 26 31 
Net cash used in investing activities (2,675)(3,034)
Cash flows from financing activities:
Payment of deferred loan costs(294)— 
Proceeds from revolving credit facility198,761 205,897 
Payments on revolving credit facility(214,215)(206,521)
Payments on term loan facility(2,084)(3,125)
Purchase of treasury stock(3,006)(1,492)
Payment of withholdings on restricted stock units(2,610)(240)
Proceeds from issuance of stock under employee stock purchase plan 55 29 
Net cash used in financing activities (23,393)(5,452)
Effect of foreign currency exchange rates on cash equivalents(296)256 
Net (decrease) increase in cash and cash equivalents (6,407)2,726 
Cash and cash equivalents at beginning of the period24,989 11,604 
Cash and cash equivalents at end of the period$18,582 $14,330 


See accompanying notes to condensed consolidated financial statements.

4
4


ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

(Unaudited)

Supplemental schedule of noncash investing and financing activities

For the Six Months Ended June 30, 2017:

Purchase of $560 in fixed assets financed through accounts payable.

For the Six Months Ended June 30, 2016:

Purchase of $1,234 in fixed assets financed through accounts payable.

Six Months Ended
June 30, 2018June 30, 2017
Supplemental disclosure of cash flow information:
Cash paid during the period for interest$926 $953 
Cash paid (refunded) during the period for taxes, net$4,683 $(2,322)
Supplemental disclosure of non-cash investing and financing activities:
Purchase of fixed assets financed through accounts payable$541 $560 
Withholdings tax on restricted stock units recorded in accrued wages and wage related expenses$21 $— 
Modification of debt that resulted in payment of existing term loan balance$11,991 $— 


See accompanying notes to condensed consolidated financial statements.

5
5


ZAGG INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars, units, & shares in thousands, except per share data)

(Unaudited)

(1)NATURE OF OPERATIONS AND BASIS OF PRESENTATION

ZAGG®

(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, ZAGG has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases, sold under the ZAGG,ZAGG®, InvisibleShield®, mophie®, and IFROGZ® brands.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations, and cash flows of the Company for the periods presented. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 20162017 Annual Report on Form 10-K. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

On March 3, 2016, the Company acquired mophie inc. ("mophie"). The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016. Based on the manner in which the Company manages, evaluates, and internally reports its operations, the Company determined that mophie will be reported as a separate reportable segment. See Notes 3 and 13 for additional details on the acquisition and the Company's reportable segments.

The condensed consolidated financial statements include the accounts of ZAGG Inc and its wholly owned subsidiaries ZAGG International Distribution Limited (“ZAGG International”); Patriot Corporation; ZAGG Intellectual Property Holding Co, Inc. (“ZAGG IP”); ZAGG Retail, Inc; ZAGG Netherlands B.V.; ZAGG Mobile Accessories Australia Pty Ltd; mophie inc.; mophie LLC; mophie Technology Development Co., Ltd; mophie Netherlands Coöperatie U.A.; and mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Recent Accounting Pronouncements (amounts2017. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in thousands)

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenuethese consolidated financial statements.

Adoption of ASC Topic 606, "Revenue from Contracts with Customers (Topic 606).” This ASU includesCustomers"
The Company adopted ASC Topic 606, "Revenue from Contracts with Customers" ("Topic 606") with a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The ASU also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU may be adopted utilizing one of two methods. The first method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively to each prior period presented in the period of adoption. The second method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. On July 9, 2015, the FASB voted to approve a one-year deferralapplication of the effective date of this ASU. This deferral was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”.January 1, 2018. As a result of ASU No. 2015-14this adoption, the Company expects that it will apply the newhas changed its accounting policy for revenue standard to annual and interim reporting periods beginning after December 15, 2017. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”. The amendments and practical expedients presented in the ASU aim to simplify the transition to the new standard, to provide practical expedients for transition and sales taxes, and to clarify certain aspects of the standard. recognition as detailed below.
The Company currently anticipates adopting the standardapplied Topic 606 on January 1, 2018, using the modified retrospective approach, with the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2018. Therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. The adoption of Topic 606 resulted in an increase in accounts receivable of $115; an increase in prepaid expenses and other current assets of $1,255 for the recognition of the right of return assets; an increase in accrued liabilities of $314; an increase in sales return liability of $5,250 for the recognition of the sales return liability on a gross basis and for the change in estimating refund liabilities under Topic 606; a decrease in deferred revenue of $314; and a decrease of $3,880 in retained earnings as a cumulative effect of adoption. The largest driver of changes for the adoption of Topic 606 was the change in estimate for price concessions offered to end customers. Under Topic 605, price concessions to end customers were recognized when such incentives were explicitly offered to the end customer, whereas under Topic 606 such incentives are estimated and recorded at the datetime of initial application. the sale of products to the Company’s customers.
6


The accounts that changed under Topic 606 for the condensed consolidated balance sheet as of June 30, 2018 have been outlined as follows:
Reported as of June 30, 2018Adjustments as of June 30, 2018Balances Without Adoption of Topic 606 as of June 30, 2018
Condensed consolidated balance sheet changes:
Accounts receivable, net of allowances $83,990 $(384)$83,606 
Prepaid expenses and other current assets 5,463 (1,140)4,323 
Accrued liabilities 6,838 (164)6,674 
Sales returns liability 34,620 (3,748)30,872 
Deferred revenue — 164 164 
Retained earnings 84,170 2,224 86,394 
The accounts that changed under Topic 606 for the condensed consolidated statement of operations for the three months ended June 30, 2018 have been outlined as follows:
Reported for the Three Months Ended June 30, 2018Adjustments for the Three Months Ended June 30, 2018Amounts Without Adoption of Topic 606 for the Three Months Ended June 30, 2018
Condensed consolidated statements of operations changes:
Net sales $118,565 $661 $119,226 
Cost of sales 80,908 (114)80,794 
The accounts that changed under Topic 606 for the condensed consolidated statement of operations for the six months ended June 30, 2018 have been outlined as follows:
Reported for the Six Months Ended June 30, 2018Adjustments for the Six Months Ended June 30, 2018Amounts Without Adoption of Topic 606 for the Six Months Ended June 30, 2018
Condensed consolidated statements of operations changes:
Net sales $230,631 $2,050 $232,681 
Cost of sales 155,381 (174)155,207 
Revenue recognition accounting policy
The Company’s revenue is derived from (1) sales of our products through our indirect channel, including retailers and distributors; (2) sales of our products through our direct channel, including www.ZAGG.com and www.mophie.com (The URLs are included here as inactive textual references and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report) and our corporate-owned ZAGG-branded store; and (3) from franchise fees derived from the on-boarding of new franchisees and the sales of our products to franchisees. The Company’s revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The observable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized.
7


For substantially all of our sales, revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. For franchise fees, revenue is derived from the sale of licenses, training, equipment and marketing, among other items. We recognize revenue for performance obligations on a straight-line basis over the franchise term.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Sales returns, discounts and other credits
The nature of our contracts gives rise to several types of variable consideration, including sales returns, discounts, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue accordingly on the invoice date.
We estimate a reserve for sales returns, discounts, and other credits, and record the respective estimated reserve amounts, including a right to return asset when a product is currently evaluatingexpected to be returned and resold. Historical experience, actual claims, and customer return rights are the impactkey factors used in determining the ASU will have on its consolidated financial statements.

estimated sales returns, discounts, and other credits.
Contract balances
The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from contracts with customers as of June 30, 2018:
6
June 30, 2018
Receivables, which comprises the balance in accounts receivable, net of allowances$83,990 
Right of return assets, which are included in prepaid expenses and other current assets1,140 
Contract liabilities, which are included in accrued liabilities164 
Refund liabilities, which are included in sales return liability30,633 
Warranty liabilities, which are included in sales return liability3,987 

In July 2015,The current balance of the FASB issued ASU No. 2015-11, “Simplifyingright of return assets is the Measurementestimated amount of Inventory.” This ASU provides guidanceinventory to entitiesbe returned that measure inventory usingis expected to be resold. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred, and therefore recognition of revenue is deferred until the transfer of control. The current balance of refund liabilities is the expected amount of sales returns, discounts and other credits from sales that have occurred.

Practical expedients and policy elections
The Company applies the following practical expedients in its application of Topic 606:
• The Company does not adjust the transaction price for significant financing components for periods less than one year.
• The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses.
• The Company recognizes the cost for shipping and handling as a method other than last-in, first-out (LIFO)fulfillment activity after control over products have transferred to the customer. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the product is shipped, net of estimated returns and discounts. Shipping and handling costs are included in cost of sales.
• The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principleless and (ii) contracts for their inventory changes from the lower of cost or market to lower of cost and net realizable value. Current U.S. GAAP requires, at each financial statement date, that entities measure inventorywhich we recognize revenue at the loweramount to which we have the right to invoice for services performed.
Disaggregation of cost or market. revenue from contracts with customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions. These are disclosed below.
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The measurementpercentage of market is commonlynet sales related to our key product lines for the current replacement cost. However, entities also needthree and six months ended June 30, 2018 and 2017, was approximately as follows:
Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Screen Protection54 %51 %52 %49 %
Power Management27 %17 %30 %17 %
Power Cases%19 %%21 %
Keyboards%%%%
Audio%%%%
Other%%%%

The percentage of net sales related to considerour key distribution channels for the three and six months ended June 30, 2018 and 2017, was approximately as follows:
Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Indirect channel88 %89 %88 %88 %
Website%%%%
Franchisees%%%%
The percentage of net realizable valuesales related to our key geographic regions for the three and net realizable value less ansix months ended June 30, 2018 and 2017, was approximately normal profit margin in their measurement. For entities using a method other than LIFO or the retail inventory method, the ASU replaces market with net realizable value. This ASU requires prospective adoption for inventory measurement for annual and interim periods beginning after December 15, 2016 for public business entities. The Company has concluded that this ASU did not have a material impact on our financial position or results of operations.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The amendments in the ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2016. During the year ended December 31, 2016, the Company adopted the ASU using the retrospective approach resulting in recording deferred tax assets as non-current for current and prior periods presented. This adoption does not impact our results of operations.

follows:

Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
United States85 %87 %83 %86 %
Europe10 %%10 %%
Other%%%%
Recent Accounting Pronouncements 
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),, which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. A number of other significant changes to lease accounting have been effected through the issuance of this standard. The requirements of the new standard for leases shall be recognized and measured at the beginning of the earliest comparative period presented. When adopted, the Company will be required to adjust equity at the beginning of the earliest comparative period presented, and the other comparative amounts disclosed for each prior period presented in the financial statements, as if the requirements of the new standard had always been applied. The new standard also contains practical expedients which the Company may elect to follow. The new standard is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including whether to elect the practical expedients outlined in the new standard.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified accounting for share-based payments. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The new standard contains several amendments that simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification


9


Reclassification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company has adopted ASU 2016-09 as of the beginning of the quarter ended March 31, 2017. During the quarter ended March 31, 2017, the Company applied the amendment relating to the recognition of excess tax benefits and deficiencies on a prospective basis and, accordingly, has recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as discrete items resulting in the recognition of income tax expense of $171 for the six months ended June 30, 2017. The Company has not recorded a cumulative-effect adjustment to retained earnings as of the beginning of thePrior Year Presentation
Certain prior year because all tax benefits had previously been recognized when the tax deductions related to stock compensation were utilized to reduce taxes payable. The Company has elected to apply the amendment related to the presentation of cash flows for excess tax benefits on a prospective basis and no prior periodsamounts have been adjusted. The Company’s financial position or results of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustment has been recorded. The Company will continue to classify cash remitted to the tax authorities as a financing activity as now required by the amendments in the ASU. The ASU permits a policy election to either record forfeitures as they occur or estimate forfeitures consistentreclassified for consistency with historical U.S. GAAP. The Company has elected to record forfeitures as they occur, which did not have a material impact on our financial position or results of operations.

7

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in the ASU should be applied using a retrospective transition method to each period presented. If it is impracticable for the amendments to be applied retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including the method of adoption.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company performs an annual goodwill impairment assessment and will elect to early adopt this standard in the current year when the assessment is performed. The Company is currently evaluating the impact this ASU will havepresentation. These reclassifications had no effect on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies what constitutesreported results of operations. A reclassification has been made with a modification of$2,347 reduction to accrued liabilities and a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

8
$2,347 increase to sales returns liability.

(2)INVENTORIES

(2) INVENTORIES
At June 30, 2017,2018 and December 31, 2016,2017, inventories consisted of the following:

  June 30,
2017
  December 31, 2016 
Finished goods $65,084  $72,490 
Raw materials  292   279 
Total inventories $65,376  $72,769 

June 30, 2018December 31, 2017
Finished goods$69,410 $74,734 
Raw materials252 312 
Total inventories$69,662 $75,046 
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at June 30, 20172018 and December 31, 20162017, of $957$1,783 and $437,$1,906, respectively.

(3)ACQUISITION OF MOPHIE INC.

On February 2, 2016, ZAGG

(3) INTANGIBLE ASSETS
There were no additions to and ZM Acquisition, Inc. (“Merger Sub”), a Delaware corporationno impairments of intangible assets for the three and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which Merger Sub agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016 (the “Acquisition Date”), the Company completed the Merger.

Results of Operations

The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016. For the period March 3, 2016, throughsix months ended June 30, 2016, mophie generated net sales of $39,6592018. There were also no additions to intangible assets for the three and a net loss before tax of $13,727.

Pro forma Results from Operations

six months ended June 30, 2017. Additionally, there were no impairments to intangible assets for the three months ended June 30, 2017. The following unaudited pro-forma resultstable summarizes the impairments of operationsgross intangible assets for the six months ended June 30, 2016 give pro forma effect as if the acquisition had occurred at the beginning of the period presented, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their values at the date of purchase.


  

Six months ended

June 30,
2016

 
Net sales $179,592 
Net loss $(7,155)
Basic loss per share $(0.25)
Diluted loss per share $(0.25)

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated for the dates indicated. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.

For the six months ended June 30, 2016, pro forma net loss includes projected amortization expense of $4,412. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the six months ended June 30, 2016 of $1,007. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $6,937 step up of mophie inventory to its fair value, which was recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date.

2017:
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December 31, 2016$108,659 
Impairment loss on patent(2,777)
June 30, 2017$105,882 

The unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.

(4)GOODWILL AND INTANGIBLE ASSETS

Goodwill

There were no additions to nor impairment of goodwill for the quarter-ended June 30, 2017. The balance of goodwill as of June 30, 2017 was $12,272.

Long-lived Intangible Assets

The following table summarizes the changes in gross long-lived intangible assets:

Gross balance at December 31, 2016 $108,659 
Impairment loss on patent  (2,777)
Gross balance at June 30, 2017 $105,882 

On April 11, 2017, the Company received a final court order stating that the claims of one of its patents were either unpatentablenot patentable or cancelled.canceled. Accordingly, management determined that the patent’s carrying value was not recoverable through future cash flows and was impaired as of March 31, 2017. Consequently, for the six months period ended June 30, 2017, the Company recorded an impairment loss to intangible assets consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of $1,959 to reduce the net carrying value of the cancelledcanceled patent to $0.

Long-lived intangible

Intangible assets, net of accumulated amortization as of June 30, 20172018 and December 31, 2016,2017, were as follows:

  June 30,
2017
  December 31,
2016
 
       
Customer relationships $11,935  $14,612 
Tradenames  19,680   21,506 
Patents and technology  12,377   15,727 
Non-compete agreements  1,317   1,497 
Other  18   20 
Total amortizable intangible assets $45,327  $53,362 

(5)INCOME TAXES

June 30, 2018December 31, 2017
Customer relationships$6,921 $9,259 
Trade names16,256 17,854 
Patents and technology9,486 10,981 
Non-compete agreements958 1,137 
Other13 
Total intangible assets, net of accumulated amortization$33,630 $39,244 
The total weighted average useful lives of intangible assets as of June 30, 2018 and December 31, 2017, was 8.1 years and 8.2 years, respectively.

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(4) INCOME TAXES
For interim periods, the tax provision is determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. The Company's effective tax rate for the three and six months ended June 30, 2018 was 23% and 15%, respectively. The Company’s effective tax rate for the three months ended June 30, 2017 and 2016, was 31.2% and 46.3%, respectively. The Company’s effective tax for the six months ended June 30, 2017 was 31% and 2016, was (23.5%) and 28.2%(24)%, respectively. The change in the effective tax rate for the three-month periodthree months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to several factors including but not limited to a change in the federal statutory rate from 35% to 21% and an increase to income in lower rate foreign jurisdictions in which the company has losses in the prior year.jurisdictions. The change in the effective tax rate for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to several factors including but not limited to a discrete expense recognized duringchange in the period relatedfederal statutory rate from 35% to 21%, a change to book income in the true upsecond quarter of a deferred amount for stock compensation and close2018 compared to break-even pre-taxa book loss in the current year.second quarter of 2017, and an increase to income from foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

(6)FAIR VALUE MEASURES

Fair Valuestrategy, and the inclusion of Financial Instruments

At June 30, 2017,global intangible low taxed income and the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a term loan. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturities of these financial instruments. The carrying value of the debt balances approximate fair value because the variable interest rates reflect current market rates.

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corresponding foreign tax credit.

Fair Value Measurements

The Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

Level 1 — Quoted market prices in active markets for identical assets or liabilities;

Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and

Level 3 — Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.

At June 30, 2017, and December 31, 2016, the following assets were measured at fair value on a recurring basis using the level of inputs shown:

     Fair Value Measurements Using: 
  June 30,
2017
  Level 1
Inputs
  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $5  $5       

     Fair Value Measurements Using: 
  December 31,
2016
  Level 1
Inputs
  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $5  $5       

(7)DEBT AND LINE OF CREDIT

(5) DEBT AND LINE OF CREDIT
Long-term debt, net as of June 30, 20172018 and December 31, 2016,2017, was as follows:

  June 30,
2017
  December 31, 2016 
Line of credit $30,683  $31,307 
Term loan  17,014   20,107 
Total debt outstanding  47,697   51,514 
Less current portion  36,868   41,791 
Total long-term debt outstanding $10,829  $9,623 

(8)STOCK-BASED COMPENSATION

June 30, 2018December 31, 2017
Line of credit $20,000 $23,475 
Long-term debt, net of deferred loan costs of $0 and $141— 13,922 
Total debt outstanding20,000 37,397 
Current portion of total debt outstanding, net of deferred loan costs of $0 and $141 — 37,397 
Total long-term debt outstanding$20,000 $— 
On April 12, 2018, the Company entered into an Amended and Restated Credit and Security Agreement (the “New Credit Agreement”) with KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as Sole Lead Arranger and Sole Book Runner, and other members of the lender group.
The New Credit Agreement consists of an $85,000 secured revolving credit facility (the “Revolver”), which is not subject to borrowing base limitations. In addition, at the Company’s option, up to $40,000 of the Revolver may be made available for the issuance of letters of credit. Proceeds from the Revolver were used to fully retire the term loan and thus the Revolver is the only credit instrument effective April 12, 2018. The Company had a loss of $243 of deferred loan costs that were written off as of the New Credit Agreement effective date, and the Company carried over $522 of previously capitalized deferred loan costs with the modification of the existing debt. The Company capitalized $294 in additional debt issuance costs, for a new beginning balance of $815 of deferred loan costs, with $780 remaining to be amortized which is included in other assets in the condensed consolidated balance sheet.
The Revolver initially bears interest at an annual rate, at the Company’s option, of (i) the Base Rate (as defined in the Credit Agreement) plus a margin of 0.25% to 1.375% based on the prior quarter-end Leverage Ratio or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.25% to 2.375% based on the prior quarter-end Leverage Ratio. The Revolver matures April 11, 2023, subject to early termination in the event of default.
In addition, the Company is required to pay a monthly Applicable Commitment Fee Rate (as defined in the New Credit Agreement) that can fluctuate between 0.175% and 0.275% based on the Leverage Ratio (as defined in the New Credit Agreement). The commitment fee is calculated monthly using the Maximum Revolving Amount (as defined in the New Credit Agreement) at the end of each calendar month, minus the Revolving Credit Exposure (exclusive of the Swing Line Exposure) (each as defined in the New Credit Agreement) at the end of such day, multiplied by the Applicable Commitment Fee Rate in effect on such day divided by three hundred sixty (360). The monthly commitment fee is payable quarterly in arrears, commencing on July 1, 2018 and continuing on each regularly scheduled payment date thereafter.

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The New Credit Agreement contains customary representations and warranties and restrictive covenants. The New Credit Agreement also contains affirmative and negative covenants requiring, among other things, the Company to meet certain financial ratio tests and to provide certain information to the lenders. The New Credit Agreement also includes financial maintenance covenants that require compliance with a Leverage Ratio and a Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement), tested at the end of each fiscal quarter commencing with the three months ended June 30, 2018.
The New Credit Agreement also contains customary events of default. If an event of default occurs, the lenders under the Credit Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all other actions permitted to be taken by a secured creditor.
As part of the New Credit Agreement, the lockbox arrangement requirement in the prior agreement was terminated and thus the Company now has full dominion of cash upon receipt from customers. Because of the lockbox arrangement in the prior agreement, amounts outstanding under the Revolver were classified as a current liability because cash receipts were required to be automatically swept against the Revolver. Because the New Credit Agreement does not have a lockbox arrangement and the Revolver does not mature until 2023, the Revolver is classified as a non-current liability.
(6) STOCK-BASED COMPENSATION
During the three and six months ended June 30, 2018, the Company granted 197 and 278 restricted stock units, respectively. During the three and six months ended June 30, 2017, the Company granted 123 and 434 restricted stock units, respectively. During the three and six months ended June 30, 2016,2018, the Company granted 380 and 713 restricted stock units, respectively. The restricted stock units granted duringwere estimated to have a weighted-average fair value per share of $11.65 and $12.48, respectively. During the three and six months ended June 30, 2017, the restricted stock units granted were estimated to have a weighted-average fair value per share of $6.35 and $6.57, respectively. The restricted stock units granted during the three and six months ended June 30, 2016 were estimated to have a weighted-average fair value per share of $5.40 and $7.33, respectively. The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to a three-year vesting term, depending on the terms of the individual grant.

As part of the 278 and 434 and 713 grants discussed above,restricted stock units granted during the first six months ofended June 30, 2018 and 2017, and 2016, the Company granted 372167 and 418372 restricted stock units, respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. TheThese performance-based restricted stock units granted in 2017 and 2016 only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. As of June 30, 2017,executive, and (2) continued employment through the Company believes it is probable that it will achieve the targets for all restricted stock units granted in the first six months of 2017. Of the 418 restricted stock units granted in 2016, 29 shares vested and 150 shares were forfeited, and 239 have not yet vested or been forfeited.

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applicable vesting date.

The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three and six months ended June 30, 2018, the Company recorded stock-based compensation expense related to restricted stock units of $807 and $1,408, respectively. During the three and six months ended June 30, 2017, the Company recorded stock-based compensation expense related to restricted stock units of $966 and $1,636, respectively, whichrespectively. Stock-based compensation expense related to restricted stock is included as a component of selling, general, and administrative expense. Duringexpense on the three and six months ended June 30, 2016, the Company recorded stock-based compensation expense related to restricted stock unitscondensed consolidated statement of $957 and $2,291, respectively, which is included as a component of selling, general, and administrative expense

operations.

During the six months ended June 30, 20172018 and 2016,2017, certain ZAGG employees elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. This resulted in the Company payingrecording $2,631 and $240 and $621, respectively, which is reflected as a reduction of additional paid-in capital. We also recognized an increasecapital, respectively. Of the $2,631 recorded as a reduction of additional paid-in capital,$21 was included in accrued wages and wage related to the employee stock purchase planexpenses as of $29 for the six months ended June 30, 2017. There was an immaterial impact to additional paid-in capital related to the employee stock purchase plan for the six months ended June 30, 2016.

(9)EARNINGS (LOSS) PER SHARE

2018.

(7) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if stock options and restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.


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The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per share and diluted earnings (loss) per share for the three and six months ended June 30, 20172018 and 2016:

  Three months ended 
  June 30,
2017
  June 30,
2016
 
Net income (loss) $3,403  $(1,046)
Weighted average shares outstanding:        
Basic  27,963   28,126 
Dilutive effect of restricted stock units and warrants  250   --- 
Diluted  28,213   28,126 
Earnings (loss) per share:        
Basic $0.12  $(0.04)
Diluted $0.12  $(0.04)

  Six months ended 
  June 30,
2017
  June 30,
2016
 
Net loss $(2,735) $(4,335)
Weighted average shares outstanding:        
Basic  28,010   27,918 
Dilutive effect of restricted stock units and warrants      
Diluted  28,010   27,918 
Earnings (loss) per share:        
Basic $(0.10) $(0.16)
Diluted $(0.10) $(0.16)

2017:

Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Net income (loss)$3,215 $3,403 $10,245 $(2,735)
Weighted average shares outstanding:
Basic28,299 27,963 28,254 28,010 
Dilutive effect of restricted stock units367 250 425 — 
Diluted28,666 28,213 28,679 28,010 
Earnings (loss) per share:
Basic$0.11 $0.12 $0.36 $(0.10)
Diluted$0.11 $0.12 $0.36 $(0.10)
For the three and six months ended June 30, 2017, there were no warrants or2018, 114 restricted stock units excluded from the calculation of diluted earnings per share. For the three months ended June 30, 2016, warrants and restricted stock unitswere used to purchase shares of common stock totaling 895 were not considered in calculating the diluted earnings per share as their effect would have been anti-dilutive.

For the six months ended June 30, 2017 and 2016, warrants and restricted stock units to purchase shares of common stock totaling 980 and 895, respectively,that were not considered in calculating diluted earnings per share, respectively, as their effect would have been anti-dilutive.

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(10)TREASURY STOCK

For the three and six months endedJune 30,, 2017, 0 and 980 restricted stock units were used to purchase shares of common stock that were not considered in calculating diluted earnings (loss) per share, respectively, as their effect would have been anti-dilutive.

(8) TREASURY STOCK
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date. As of June 30, 2018 and December 31, 2017, a total of $14,552 and $17,558 remained authorized under the stock repurchase program, respectively.
For the three and six months ended June 30, 2018, the Company purchased 0 and 234repurchased 182 shares of ZAGG Incthe Company's common stock, respectively.stock. Cash consideration paid for the purchasenoted share repurchases was $3,006, which included commissions paid to brokers of ZAGG Inc common stock for$7. For the three and six months ended June 30, 2018, the weighted average price per share repurchased was $16.49. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.
For the three months ended June 30, 2017, no share repurchases occurred.
For the six months ended June 30, 2017, the Company repurchased 234 shares of the Company's common stock. Cash consideration paid for the noted share repurchases was $1,492, which included commissions paid to brokers of $9. For the six months ended June 30, 2017, the weighted average price per share was $6.32.$6.35. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

For the three and six months ended June 30, 2016, no purchases of treasury stock occurred.

(11)COMMITMENTS AND CONTINGENCIES


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(9) COMMITMENTS AND CONTINGENCIES
Operating leases

Leases

The Company leases office and warehouse space, office equipment, and mall cart locationsa retail store location under operating leases that expire through 2023.2025. Future minimum rental payments required under the operating leases at June 30, 20172018, were as follows:

Remaining 2017 $1,457 
2018  2,177 
2019  1,714 
2020  1,529 
2021  1,455 
Thereafter  2,584 
Total $10,916 

Remaining 2018$1,075 
20192,880 
20202,744 
20212,448 
20222,508 
Thereafter4,053 
Total operating lease commitments$15,708 
For the three and six months ended June 30, 2018, rent expense was $818 and $1,546, respectively. For the three and six months ended June 30, 2017, and 2016, rent expense was $758 and $939, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations.$1,443, respectively. Rent expense iswas recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.

For the six months ended June 30, 2017 and 2016, rent expense was $1,443 and $1,656, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations. Rent expense is recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.

Commercial Litigation

Daniel Huang, individually and as shareholder representative v.

ZAGG Inc, Court of Chancery of the State of Delaware, C.A. No. 12842. On October 21, 2016, Daniel Huang, as the representative of the mophie, inc. shareholders, under the Merger Agreement dated February 2, 2016, by and among the Company, ZM Acquisition, Inc. and mophie, inc.Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”).  On December 15, 2017, ZAGG and mophie filed a lawsuit against the CompanyAnker Lawsuit alleging that the Company breached the Merger AgreementAnker Technology Co. Ltd. (“Anker”) and Fantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones.  The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; and PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery.  The complaint filed by failing to pay certain contingent payments (the “Contingent Payments”) related to tax refundsZAGG and customs duty recoveriesmophie seeks monetary damages and seeking damages in an amount no less than $11,420.injunction against Anker.  On December 16, 2016, the CompanyMarch 12, 2018, Anker and Fantasia filed an Answeranswers and Counterclaimscounterclaims in the lawsuit. In its Answer, the Company acknowledges its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but avers that this obligation is subject to rights of offsettheir answers, Anker and recoupment, each of which applies to Huang’s claims. In its Answer, the Company denies that any payments are due at this time or that it is in breachFantasia denied infringement of any provisionvalid claim and asserted counterclaims for non-infringement and invalidity of the Merger Agreement. Regarding the Counterclaims, after the closing of the merger, ZAGG discovered breaches of certain representations, warranties and covenants made by Huang and mophie that have resulted in damages exceeding $22,000. In addition to these breaches, the Company has also discovered that mophie fraudulently misrepresented or omitted facts related to (i) a certain product return program, resulting in a substantial overstatement of the value of mophie’s inventory and understatement of mophie’s sales return reserve, (ii) breaches of contracts by Huang and certain other former employees of pre-merger mophie, and (iii) certain intellectual property belonging to mophie that was misappropriated by Huang and other former employees of pre-merger mophie. In its Counterclaims, the Company asserts claims based on these facts against Huang and certain other indemnitors for breaches of representations, warranties and covenants in the Merger Agreement, fraudulent concealment and declaratory judgment. On February 6, 2017, Huang filed a Motion to Dismiss the Counterclaims. On March 28, 2017, ZAGG filed its Answer in Opposition to Huang’s Motion to Dismiss. On July 18, 2017, Huang filed a Motion for Summary Judgement. The Court of Chancery will schedule a hearing in the future on Huang’s Motion to Dismiss and Motion for Summary Judgment. patents at issue.
The Company recorded a liability based on its estimate ofdisputes Anker’s contentions and will defend the Contingent Payments as part of purchase accounting.claims and otherwise respond to the allegations.  The Company will accruematter is scheduled for future Contingent Payments, including tax refunds, proceeds received on the land held for sale, and customs duty recoveries as they are collected.trial in November 2019.  This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

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ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, State of California, Civil No. 30-2016-00892767-CU-BC-CJC. On December 15, 2016, the Company and mophie filed a complaint against Daniel Huang and Immotor, LLC (“Immotor”). The complaint alleges that Huang and the company he founded, Immotor, misappropriated confidential information belonging to mophie while Huang was serving as an officer and director of mophie. Based on these allegations, mophie asserts claims for breach of contract, trade secret misappropriation in violation of California Civil Code § 3426 et seq., breach of fiduciary duty, and conversion, and the Company asserts claims against Huang for breaches of his employment agreement, inventions agreement, separation agreement and consulting agreement. On February 28, 2017, Huang and Immotor filed a Demurrer to the Complaint filed by ZAGG and mophie. ZAGG and mophie opposed the Demurrer, and on June 13, 2017 the Orange County Superior Court entered an order overruling the Demurrer in its entirety. On June 22, 2017, Huang and Immotor filed an Answer to the Complaint asserting a general denial of all allegations.  ZAGG and mophie served Huang and Immotor with a trade secret disclosure on July 19, 2017, as is required of a plaintiff in a trade secret case under California’s civil rules.  ZAGG and mophie also served discovery requests on this date.  Huang and Immotor’s responses to those requests are due on August 24, 2017.  This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

Peter Kravitz v. ZAGG Inc., U.S. Bankruptcy Court, District of Delaware, Adv. Pro. No. 15-51558(BLS).On October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”) of the RSH Liquidating Trust (formerly known as RadioShack) filed a complaint against the Company, alleging, among other things, that the Company received preference payments for product the Company sold and delivered to RadioShack in the amount of $1,834 pursuant to Section 547 of the Bankruptcy Code and in the alternative pursuant to Section 548 of the Bankruptcy Code. The case was settled by the Company in April 2017. The settlement amount was not considered material to the Company’s financial position, results of operations, or liquidity.

Eric Stotz and Alan Charles v. mophie inc., U.S. District Court, Central District of California, Civil Action No. 2:16-cv-08898-GW-FFM. On January 13, 2017, Eric Stotz and Alan Charles, individually and on behalf of a purported class, filed a first amended class action complaint alleging that they purchased certain external battery packs and that the battery packs did not extend the life of the phones’ internal batteries as advertised and adversely affected the phones’ internal battery life. Plaintiffs allege violations of California’s unfair competition law, California’s Consumer Legal Remedies Act, New York’s unlawful deceptive acts and practices statute, and New York’s false advertising law. The Company has denied all liability and will defend the claims and otherwise respond to the allegations. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity. 

MobileExp, LLC v. mophie inc., U.S. District Court, Eastern District of Texas, Civil Action No. 2:16-cv-1340.On November 30, 2016, MobileExp, LLC filed a lawsuit alleging that Mophie Space Pack for the iPhone 5S, 5, 6, 6 Plus, and iPad Mini infringed on certain claims of U.S. Patent No. 8,879,246. The Company has denied all liability and filed a counterclaim alleging that the claims of U.S. Patent No. 8,879,246 are invalid. On February 23, 2017, Civil Action No. 2:16-cv-1340 was consolidated with 2:16-cv-1339, the latter being the lead case. On June 9, 2017, the claims and counterclaims between MobileExp, LLC and the Company were dismissed with prejudice.

SEC Investigation

In the fourth quarter of 2012, the Company received requests to provide documentation and information to the staff of the SEC in connection with an investigation being conducted by the SEC’sSEC's Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding former Chief Executive Officer Robert Pedersen’sPedersen's pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’sCompany's 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. The Company responded to these requests and is cooperating with the staff although there has been no resolution to date.

Other Litigation

The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.

The Company establishes reserves when a particular contingency is probable and estimable. Other than those discussed above, theThe Company has not accrued for any loss atas of June 30, 2017,2018, in the condensed consolidated financial statements as the Company does not consider a loss to be probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.

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(12)CONCENTRATIONS

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(10) CONCENTRATIONS
Concentration of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in suchcash accounts throughfor the six months ended June 30, 2018 and 2017.

At June 30, 2018 and December 31, 2017, two separate customers exceeded 10% of the balance of accounts receivable, from two separate customers exceeded 10%: Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”). GENCO Distribution Systems, Inc. (“GENCO”) exceeded 10% of accounts receivable as of December 31, 2016, but not as of June 30, 2017. At June 30, 2017, the balance of accounts receivable from two separate customers exceeded 10%:

  June 30,
2017
  December 31, 2016 
Superior  38%  32%
Best Buy  14%  22%
GENCO  8%  10%

follows:

June 30, 2018December 31, 2017
Superior Communications, Inc. (“Superior”)43 %31 %
Best Buy Co., Inc. (“Best Buy”)14 %18 %
No other customer account balances were more than 10% of accounts receivable at June 30, 2017,2018 or December 31, 2016.2017. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.

Concentration of suppliers

We do not directly manufacture any of our products; rather, we employ various third party manufacturing partners in the United States and Asia to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. We have endeavored to use common components and readily available raw materials in the design of our products that can be sourced from multiple sub-suppliers. However, raw film used in our InvisibleShield film and InvisibleShield On-Demand (“ISOD”) products has been produced by a single supplier for the last ninemany years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors.

Below is a high-level summary by product category of the manufacturing sources used by the Company:

Screen Protection – Our screen product line is comprised of sales of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).
Battery Cases and Power Management – Our battery case and power management product lines consists of power products that are designed to provide on-the-go power for tablets, smartphones, MP3 players, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Keyboards– Our keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Audio– Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.

• Screen Protection – Our screen product line is comprised of sales of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).
• Battery Cases and Power Management – Our battery case and power management product lines consists of power products that are designed to provide on-the-go power and wireless charging for tablets, smartphones, laptops, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
• Keyboards – Our keyboard product line consists of (1) device specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
• Audio – Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Our product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier understands, and will build according to, the product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet our supply needs.

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Concentration of net sales

For the three and six months ended June 30, 2018, Superior and Best Buy accounted for over 10% of net sales, and for the three months ended June 30, 2017, and 2016, Superior was our largest customer which accounted for over 10% of net sales; GENCO also accounted for over 10% of net sales, while for the three months ended June 30, 2016, as follows:

  

Three months ended

June 30,
2017

  Three months ended June 30,
2016
 
Superior  31%  27%
GENCO  8%  12%

For the six months ended June 30, 2017, and 2016, Superior and GENCO were our largest customers with each accounting for over 10% of net sales; Best Buy also accounted for over 10% of net sales, foras follows:

Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
Superior34 %31 %31 %29 %
Best Buy11 %%10 %%
GENCO%%%10 %
For the three and six months ended June 30, 2016, as follows:

  

Six months ended

June 30,
2017

  Six months ended June 30,
2016
 
Superior  29%  24%
GENCO  10%  11%
Best Buy  8%  10%

During2018 and 2017, and 2016 no other customers accounted for greater than 10% of net sales.

Although we have contracts in place governing our relationships with our retail distribution customers (“retailers”), the contracts are not long-term and all of our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.

Concentration of region
The percentage of net sales by geographic region for the three months ended June 30, 2017 and 2016, was approximately:

  2017  2016 
United States  87%  90%
Europe  8%  6%
Other  5%  4%

The percentage of net sales by geographic region for the six months ended June 30, 20172018 and 2016,2017, was approximately:

  2017  

2016

 
United States  86%  89%
Europe  8%  7%
Other  6%  4%

(13)SEGMENT REPORTING

The Company designs, produces, and distributes professional and premium creative product solutions in domestic and international markets. The Company’s operations are conducted in two reporting business segments: ZAGG and mophie. The Company defines its segments as those operations whose results its chief operating decision maker regularly reviews to analyze performance and allocate resources. The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016.

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Three Months EndedSix Months Ended
June 30, 2018June 30, 2017June 30, 2018June 30, 2017
United States85 %87 %83 %86 %
Europe10 %%10 %%
Other%%%%

 

The ZAGG segment designs and distributes screen protection, keyboards for tablet computers and other mobile devices, earbuds, headphones, Bluetooth speakers, mobile power, cables, and cases under the ZAGG, InvisibleShield, and IFROGZ brands. Domestic operations are headquartered in Midvale, Utah, while international operations are directed from Shannon, Ireland.

The mophie segment designs and distributes power cases, mobile power, cases, and cables under the mophie brand. Worldwide operations are headquartered in Tustin, California, while international operations are directed from Shannon, Ireland.

The Company measures the results


(11) SUBSEQUENT EVENTS
Acquisition of its segments using, among other measures, each segment’s net sales, gross profit, and operating income (loss).

Net sales by segment were as follows:

  Three months ended June 30,
2017
  Three months ended June 30,
2016
 
       
ZAGG segment $74,259  $67,810 
mophie segment  40,968   32,023 
Net sales $115,227  $99,833 

  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
       
ZAGG segment $131,424  $122,607 
mophie segment  76,749   39,659 
Net sales $208,173  $162,266 

Gross profit by segment were as follows:

  Three months ended June 30,
2017
  Three months ended June 30,
2016
 
       
ZAGG segment $27,790  $26,645 
mophie segment  8,034   4,228 
Gross profit $35,824  $30,873 

  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
       
ZAGG segment $52,093  $49,465 
mophie segment  12,337   5,137 
Gross profit $64,430  $54,602 

Income (loss) from operations by segment were as follows:

  Three months ended
June 30,
2017
  Three months ended
June 30,
2016
 
       
ZAGG segment $9,177  $8,288 
mophie segment  (3,680)  (9,640)
Income (loss) from operations $5,497  $(1,352)

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BRAVEN

  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
       
ZAGG segment $10,216  $8,701 
mophie segment  (11,368)  (13,756)
Loss from operations $(1,152) $(5,055)

Total assets by segment were as follows:

  

June 30,
2017

  

December 31,
2016

 
       
ZAGG segment $141,192  $156,123 
mophie segment  140,482   154,606 
Total assets $281,674  $310,729 

(14)SUBSEQUENT EVENTS

On July 17, 2017, ZAGG Inc, KeyBank National Association (“KeyBank”), ZB, N.A. dba Zions First National Bank (“Zions Bank”), and JPMorgan Chase Bank, N.A. (collectively,20, 2018, the “Lenders”), and KeyBank, as the administrative agent for the Lenders,Company entered into a Third Amendment Agreement (“Amendment”), which amendsand closed an asset purchase agreement to acquire the original CreditBRAVEN brand, inventory, intellectual property, accounts receivable, product and Security Agreement dated as of March 3, 2016 byengineering team, and among the Company, KeyBank, KeyBanc Capital Markets Inc., Zions Bank,certain other assets and the other lenders party thereto, as amended byliabilities for $5,000. BRAVEN  products that certain First Amendment Agreement dated as of May 31, 2016include rugged Bluetooth® speakers and that certain Second Amendment Agreement dated as of March 8, 2017 (collectively, the “Credit Agreement”), to:

Increase the Maximum Revolving Amount, as defined in the Credit Agreement, from $85,000 to:
$135,000 from July 17, 2017 to December 31, 2017;
$110,000 million from January 1, 2018 to May 31, 2018; and
$100,000 from June 1, 2018 forward.
Expand Permitted Foreign Subsidiary Loans, Guaranties and Investments, as defined in the Credit Agreement, to include:
A $2,000 loan dated April 5, 2017 from the Company to ZAGG International Distribution Limited; and
Any other loan or investment by the Company or any domestic subsidiary of the Company in or to, or guaranty of indebtedness of, any foreign subsidiary of the Company for the period July 17, 2017 to March 31, 2018, in an aggregate amount not to exceed $8,000.
Increase the Letter of Credit Commitment, as defined in the Credit Agreement, from $7,500 to an aggregate amount of $40,000.
Increase the Borrowing Base, as defined in the Credit Agreement, on a seasonal basis between August 1, 2017 and September 30, 2017 by $15,000.

In connection with the Amendment, the Company also entered into replacement revolving credit notes with each of the Lenders. As consideration for entering into the Amendment, the Company agreed to pay the administrative agent and Lenders total amendment and arrangement fees of $145, pursuant to the terms of an administrative agent fee letter and a closing fee letter entered into with KeyBank. The changes to the Credit Agreement described above were made to support core-business opportunities.

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earbuds.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affecteffect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Our Business

ZAGG is an innovation leader in mobile tech accessories for smartphones and tablets. The Company’s commitmentCompany is committed to enhance every aspect of performance, productivity and durability in mobile devices with creative product solutions. ZAGG was created from the concept of applying a clear film originally designed to protect military-helicopter blades in harsh desert conditions to protect consumers’ mobile devices. Mobile devices are essential to modern living and ZAGG’s mission is to ensure better performance in the real world.

In addition to its home-grown brands, ZAGG has created a platform to combine category-creating and innovative brands that address specific consumer needs to empower a mobile lifestyle. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases sold under the ZAGG, InvisibleShield, mophie,ZAGG®, InvisibleShield®, mophie®, and IFROGZIFROGZ® brands.

We maintain our corporate headquarters at 910 West Legacy Center Drive,Way, Suite 500, Midvale, UT,Utah 84047. The telephone number of the Company is 801-263-0699.(801) 263-0699. Our website addresses arewww.ZAGG.com andwww.mophie.com. The (the URLs are included here in this report as inactive textual references. Informationreferences and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report.

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report).

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The Company has established four corporate objectives and seven core values to act as a foundation for ZAGG's corporate culture and guide ZAGG daily:


zagg-20180630_g1.jpg

Corporate ObjectivesCore Values
Corporate ObjectivesCore Values
The Preferred BrandIntegrity
Creative Product SolutionsOwnership
Targeted Global DistributionCare for People
Operational ExcellencePassion
Continuous Improvement
Performance
Sense of Urgency


The corporate objectives are intended to align the Company’s functional teams’ goals and execution. Every ZAGG employee is trained to understand herhis or hisher role in executing to these objectives. Each core value acts as a key component in working toward ZAGG’s corporate objectives of providing creative product solutions, executing targeted global distribution, achieving operational excellence, and being the preferred brand for its customers.

Our Products

InvisibleShield Products

InvisibleShield products are designed to provide premium, lifetime protection for mobile device screens against shattering or scratching through military-grade solutions. Our products are designed to provide peace of mind by enabling consumers to fearlessly enjoy their mobile devices and never experience the inconvenience of a shattered or scratched screen.

InvisibleShield is focused on producing industry-leading screen and device protection. FromOur protective film and glass to cases, InvisibleShield products offer consumers a wide array of protection types and features, all with a limited lifetime warranty.

Our InvisibleShield films were originally developed to protect the leading edge of rotary blades on military helicopters. Through constant innovation, we continue to formulate new films that are designed to offer the highest standards in self-healing scratch and impact protection. We also continue to drive innovation around simplifying the customer application experience like we’ve done with our EZ Apply® tabs, which are designed to help users align and apply InvisibleShield products. We also provide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”) solution. With ISOD, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.

Launched during the first quarter of 2014, InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and universally compatible touch sensitivity. In the third quarter of 2016 we announced InvisibleShield Glass+, designed to provide additional scratch resistance and impact protection over InvisibleShield Glass. Additionally, we launched InvisibleShield Sapphire Defense during the third quarter of 2016, which is a hybrid glass screen protector infused with sapphire crystals designed to provide premium screen protection.

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ZAGG has the leading market share in screen protection, and has maintained that leading position by consistently delivering innovative products to the market.

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mophie Products

mophie is a leading battery case, and mobile power, and wireless charging brand with award-winning products designed to liberate mobile users from the limitations of mobile devices by providing more time to rock, talk, watch, game, surf, save, and send. Notably, the original juice pack® is designed to provide device-specific protection as well as additional battery power to many of the most popular mobile phones. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design.

The mophie ecosystem of mobile accessories is designed to provide both power and protection for virtually any mobile device. With groundbreaking battery cases, including extra data storage options, wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.

During the third quarter of 2017, mophie launched an innovative new universal wireless charging pad that is designed to provide an optimized charging experience for the iPhone 8, iPhone 8 Plus and iPhone X; the mophie charging pad also includes latest Qi wireless charging technology for universal compatibility.
IFROGZ Products

IFROGZ products are strategically designed and positioned to bring personal audio to the value space by providing a product assortment that represents outstanding performance, active lifestyles, and dual-purpose designs that are on trend with consumers’ needs. IFROGZ refines today’s newest audio technology to deliver the features consumers want, while eliminating those that needlessly increase costs, so that everyone can participate in our increasingly mobile world.

In 2007, the IFROGZ EarPollution™ product line was released. The eclectic selection of earbuds and headphones specifically targeted a younger demographic while still appealing to a wide spectrum of consumers. We continue to innovate and expand our headphone and earbud product lines under the IFROGZ name to include offerings for all ages under both the EarPollution and IFROGZ brands. In 2013, we began offering IFROGZ portable Bluetooth speakers for music lovers on the move that combine impressive audio quality, clever functionality, and eye-catching design. In the third quarter of 2016, we introduced a new family of wireless Bluetooth audio products designed to combine outstanding sound with a lightweight listening experience by alleviating bulky earbuds and heavy control modules.

ZAGG Products

Products under the ZAGG brand are designed to empower people to live their lives unleashed. Mobility is changing everything and ZAGG is driving the mobile lifestyle forward with products that are designed to allow consumers to be productive and connected at work, at play and at rest. ZAGG products which include keyboards, cases, power management and social tech are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. We support the communicators, commuters, creators and closers who live a mobile lifestyle.

Our ZAGG products are designed to feature cutting-edge design and innovation to provide portability, style, and productivity that can keep up with even the most active mobile users. We believe that with the right mobile accessories, no one ever has to feel tethered or held back.

ZAGG keyboards are designed to offer consumers an enhanced and innovative productivity experience. Since entering this category in 2010, ZAGG has continually reinvented its line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft, and Samsung, as well as other leading mobile device manufacturers. In addition to device-specific keyboards and folio keyboard cases, ZAGG’s line of universal full-size Bluetooth® keyboards are designed to be compatible with virtually any device and mobile operating system. We continue to innovate and expand our wireless keyboard product lines as end users’ requirements evolve in this rapidly changing market segment.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.

report except for the implementation of certain estimates for revenue recognition under Topic 606 as disclosed below.


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Revenue recognition accounting policy
The Company’s revenue is derived from (1) sales of our products through our indirect channel, including retailers and distributors; (2) sales of our products through our direct channel, including www.ZAGG.com and www.mophie.com and our corporate-owned ZAGG-branded store; and (3) from franchise fees derived from the on-boarding of new franchisees. The Company’s revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The observable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized.
For substantially all of our sales, revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. For franchise fees, revenue is derived from the sale of licenses, training, inventory and equipment and marketing, among other items. We recognize revenue for performance obligations on a straight-line basis over the franchise term.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Topic 606 has required significant changes to how the Company's revenue is recognized. Updates to the Company's accounting policies have been made as part of adoption of this new standard. These changes to the Company's accounting policies and procedures under the new standard have most significantly impacted the estimates previously used to determine the company's sales returns, discounts and other credits. The new reserve calculations for these estimates apply assumptions allowable under Topic 606, which require judgment. In applying these new assumptions, and in the application of Topic 606, the Company has determined that the updated accounting policies to ensure compliance under Topic 606 continue to be critical accounting policies and estimates.
Sales returns, discounts and other credits
The nature of our contracts gives rise to several types of variable consideration, including sales returns, discounts, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue accordingly on the invoice date.
We estimate a reserve for sales returns, discounts, and other credits, and record the respective estimated reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales returns, discounts, and other credits.
Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 1, “Nature of Operations and Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.

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Results of Operations

THREE MONTHS ENDED

Three months ended June 30, 2018 and 2017 AND 2016 (amounts (in thousands, except per share data)

Net sales

Net sales for the three months ended June 30, 2017,2018, were $115,227$118,565, compared to net sales of $99,833$115,227 for the three months ended June 30, 2016,2017, an increase of $15,394,$3,338, or 15%approximately 3%. The $3,338 increase in net sales comparingwas primarily attributable to (1) the six months ended June 30, 2017increase in sales of our power management products, specifically related to 2016 was attributed towireless charging accessories, and (2) increased sales of screen protection and power management products in key wireless and retail accounts, particularly in international markets.

These increases were partially offset by a decrease in sales of power cases.


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The percentage of net sales related to our key product lines for the three months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
Screen Protection  51%  48%
Power Cases  19%  23%
Power Management  17%  12%
Keyboards  5%  10%
Audio  7%  6%
Other  1%  1%

approximately as follows:

Three Months Ended
June 30, 2018June 30, 2017
Screen Protection54 %51 %
Power Management27 %17 %
Power Cases%19 %
Keyboards%%
Audio%%
Other%%
The percentage of net sales related to our key distribution channels for the three months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
Indirect channel  89%  87%
Website  7%  9%
Mall cart and kiosk program  4%  4%

approximately as follows:

Three Months Ended
June 30, 2018June 30, 2017
Indirect channel88 %89 %
Website%%
Franchisees%%
The percentage of net sales byrelated to our key geographic regionregions for the three months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
United States  87%  90%
Europe  8%  6%
Other  5%  4%

approximately as follows:

Three Months Ended
June 30, 2018June 30, 2017
United States85 %87 %
Europe10 %%
Other%%

Gross profit

Gross profit for the three months ended June 30, 2017,2018, was $35,824,$37,657, or approximately 31%32% of net sales, as compared to $30,873,gross profit of $35,824, or approximately 31% of net sales for the three months ended June 30, 2016. Typically, the Company experiences higher2017. The increase in gross profit margin in periods whenwas primarily attributable to (1) the mix of screen protection products, increases. Although the mix of screen protection productsour highest margin product category, which increased during the second quarterthree months ended June 30, 2018, to approximately 54% of 2017 to 51% ofnet sales compared to 48%approximately 51% of net sales in 2016, sales of curved glass forduring the Samsung Galaxy S8 occurred at lower grossthree months ended June 30, 2017, and (2) improved margins than our other screen protection products, resulting in lower margins than we would otherwise see in periods of increased mix of screen protection sales. The margin impact from sales of curved glass was offset by improved mophie gross profit margins which increased year-over-year driven primarily by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.

on mophie-branded products.

Operating expenses

Total operating

Operating expenses for the three months ended June 30, 2017,2018, were $30,327, a decrease$32,464, compared to operating expenses of $1,898, or 6%, from total operating expenses$30,327 for the three months ended June 30, 2016,2017, an increase of $32,225.$2,137, or approximately 7%. The $1,898 decrease$2,137 increase in operating expenses was primarily attributable to (1) synergies realized from cost reduction initiatives,increases in headcount to support additional growth of the Company, and (2) a reductionincreases in advertising and marketing spend, and (3) reduced amortization expense related to long-lived intangibles in the current year, which is based on estimated cash flows of the associated intangible assets.

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spend.

Income (loss)We recognized income from operations

We reported of $5,193 for the three months ended June 30, 2018, compared to income from operations of $5,497 for the three months ended June 30, 2017, a decrease of $304.


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Other expense, net
For the three months ended June 30, 2018, other expense was $1,027 compared to a loss from operationsother expense of ($1,352)$552 for the three months ended June 30, 2016, an increase of $6,849.2017. The increase in income was primarily attributed to the increases in net sales and the reduction of operating expense items noted above.

Other expense

For the three months ended June 30, 2017, total other expense net was $552 comparedis primarily attributable to other expense, neta loss on foreign exchange transactions of $595approximately $681.

Income tax provision
We recognized an income tax provision of $951 for the three months ended June 30, 2016.

Income taxes

We recognized2018, compared to an income tax expenseprovision of $1,542 for the three months ended June 30, 2017, compared to an income2017. Our effective tax benefit of $901rate was 23% and 31% for the three months ended June 30, 2016. Our effective tax rate was 31.2%2018 and 46.3% for the three months ended June 30, 2017, and 2016, respectively. The decreasechange in the effective tax rate was due to several factors including but not limited to a change in the federal statutory rate from 35% to 21% and an increase to income in lower rate foreign jurisdictions in which the company experienced losses in the prior year.jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

Net income (loss)

As a result of these factors, we reported

We recognized net income of $3,403, or $0.12$3,215, with diluted earnings per share for the quarter ended June 30, 2017, compared to a net loss of ($1,046), or ($0.04) per share, for the quarter ended June 30, 2016.

Segment Information

ZAGG segment net sales$0.11 for the three months ended June 30, 2017, were $74,2592018, compared to net salesincome of $67,810$3,403, with diluted earnings per share of $0.12, for the three months ended June 30, 2016, an increase of $6,449, or 10%. The increase in net sales was largely due to an increase in screen protection and audio sales which were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.

mophie segment net sales for the three2017.

Six months ended June 30, 2017, were $40,968 compared to net sales of $32,023 for the three months ended June 30, 2016, an increase of $8,945, or 28%. The increase in net sales was largely due to an increase in power management sales during the quarter.

ZAGG net income from operations totaled $9,177 for the three months ended June 30, 2017, compared to income from operations of $8,288 for the three months ended June 30, 2016, an increase of $889. The increase in income from operations for the ZAGG segment was due primarily to increases in sales primarily driven by screen protection.

The net loss from operations for the mophie segment totaled ($3,680) for the three months ended June 30, 2017, compared to net loss from operations of ($9,640) for the three months ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017,2018 and a reduction in expenses related to salaries and professional fees.

SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (amounts (in thousands, except per share data)

Net sales

Net sales for the six months ended June 30, 2017,2018, were $208,173$230,631, compared to net sales of $162,266$208,173 for the six months ended June 30, 2016,2017, an increase of $45,907,$22,458, or 28%approximately 11%. The $22,458 increase in net sales comparingwas primarily attributable to (1) the six months ended June 30, 2017 to 2016 was attributed to increasedincrease in sales of our power management products, specifically related to wireless charging accessories, and (2) increases in screen protection for new device releases during the current year as well has higherproducts in key wireless and retail accounts, particularly in international markets. These increases were partially offset by a decrease in sales of power management products. In addition, 2017 results include six months of mophie sales compared with four months in 2016.

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cases.

The percentage of net sales related to our key product lines for the six months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
Screen Protection  49%  54%
Power Cases  21%  17%
Power Management  17%  10%
Keyboards  6%  11%
Audio  6%  7%
Other  1%  1%

approximately as follows:

Six Months Ended
June 30, 2018June 30, 2017
Screen Protection52 %49 %
Power Management30 %17 %
Power Cases%21 %
Audio%%
Keyboards%%
Other%%
The percentage of net sales related to our key distribution channels for the six months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
Indirect channel  88%  86%
Website  9%  9%
Mall cart and kiosk program  3%  5%

approximately as follows:

Six Months Ended
June 30, 2018June 30, 2017
Indirect channel88 %88 %
Website%%
Franchisees%%

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The percentage of net sales byrelated to our key geographic regionregions for the six months ended June 30, 2018 and 2017, and 2016, was approximately:

  2017  2016 
United States  86%  89%
Europe  8%  7%
Other  6%  4%

approximately as follows:


Six Months Ended
June 30, 2018June 30, 2017
United States83 %86 %
Europe10 %%
Other%%
Gross profit

Gross profit for the six months ended June 30, 2017,2018, was $75,250, or approximately 33% of net sales, compared to gross profit of $64,430, or approximately 31% of net sales, as compared to $54,602, or approximately 34% of net sales for the six months ended June 30, 2016.2017. The decreaseincrease in gross profit margin was primarily dueattributable to (1) a fullthe mix of screen protection products, our highest margin product category, which increased during the six months ended June 30, 2018, to approximately 52% of mophie operations in 2017, which are at lower gross profit margins than the corporate average, (2) lower gross profit margin on curved glass for the Samsung Galaxy S8,net sales compared to historical grossapproximately 49% of net sales during the six months ended June 30, 2017, and (2) improved margins on non-curved glass products and (3) these items were offset by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.

mophie-branded products.

Operating expenses

Total operating

Operating expenses for the six months ended June 30, 2017,2018, were $65,582, an increase of $5,925, or 10%, from total$62,138, compared to operating expenses for the six months ended June 30, 2016, of $59,657. The $5,925 increase was primarily attributable to (1) the inclusion of six months of mophie-related expenses for 2017 compared with four months in 2016, (2) the impairment of intangible asset related to an invalidated patent totaling $1,959, and (3) increased legal and travel expense. These increases were partially offset by the following reductions in operating expense: (1) synergies realized from cost reduction initiatives, (2) a reduction in transaction-related costs, (3) a reduction in advertising and marketing spend, and (4) an overall reduction in amortization expense.

Income (loss) from operations

We reported a loss from operations of ($1,152)$65,582 for the six months ended June 30, 2017, a decrease of $3,444, or approximately 5%. The $3,444 decrease in operating expenses was primarily attributable to (1) a $1,959 charge in 2017 related to the impairment of a patent that did not recur in 2018, and (2) operating expense synergies realized related to the mophie integration. These decreases in operating expense were partially offset by (1) increases in headcount to support additional growth of the Company and (2) increases in advertising and marketing spend.

Income (loss) from operations
We recognized income from operations of $13,112 for the six months ended June 30, 2018, compared to a loss from operations of ($5,055)$1,152 for the six months ended June 30, 2017, an increase of $14,264.
Other expense, net
For the six months ended June 30, 2018, other expense was $1,032 compared to other expense of $1,062 for the six months ended June 30, 2016, a decrease of $3,903.2017. The decrease in loss from operations was dueother expense is primarily attributable to a reduction of the mophie segment loss from operations from ($13,756) to ($11,368) and the other operatinginterest expense items discussed above. The decrease was also due to lower carrying amounts for the increase in net sales and gross profit, offset byCompany's debt.
Income tax provision
We recognized an increase in operating expenses as noted above.

Other expense

Forincome tax provision of $1,835 for the six months ended June 30, 2017, total other expense, net was ($1,062)2018, compared to other expense, net of ($983) for the three months ended June 30, 2016. The increase in expense was primarily related to interest expense incurred on the higher debt levels compared to the prior period.

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Income taxes

We recognizedan income tax expenseprovision of $521 for the six months ended June 30, 2017, compared to an income2017. Our effective tax benefit of $1,703rate was 15% and (24)% for the six months ended June 30, 2016. Our2018 and 2017, respectively. The change in the effective tax rate was (23.5%) and 28.2% fordue to several factors including but not limited to a change in the six months ended June 30,federal statutory rate from 35% to 21%, a change to book income in the second quarter of 2018 compared to a book loss in the second quarter of 2017, and 2016, respectively. The negative tax rate for the six-month period ended June 30, 2017, was duean increase to a discrete expense recognized during the first quarter related to the true-up of a deferred amount for stock compensation and close to break-even pre-tax book loss for the six months ended June 30, 2017. The rate was also affected by income infrom foreign jurisdictions that had losses in prior years.jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

Net loss

As a resultincome (loss)

We recognized net income of these factors, we reported a net loss of ($2,735), or ($0.10)$10,245, with diluted earnings per share of $0.36 for the six months ended June 30, 2017,2018, compared to a net loss of ($4,335), or ($0.16)$2,735, with diluted loss per share of $0.10, for the six months ended June 30, 2016.

Segment Information

ZAGG segment net sales for the six months ended June 30, 2017, were $131,424 compared to net sales of $122,607 for the six months ended June 30, 2016, an increase of $8,817, or 7%. The increase in net sales was largely due to an increase in screen protection and audio sales which were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.

Net sales for the mophie segment for the six months ended June 30, 2017 were $76,749 compared to net sales of $39,659 for the six months ended June 30, 2016, an increase of 37,090, or 94%. The increase in net sales was driven by strong sales of our power management products in 2017 and the inclusion of six months of results for the period ended June 30, 2017, compared to four months of sales for the period ended June 30, 2016.

ZAGG net income from operations totaled $10,216 for the six months ended June 30, 2017, compared to income from operations of $8,701 for the six months ended June 30, 2016, an increase of $1,515. The increase in income from operations for the ZAGG segment was due primarily to increases in sales primarily driven by screen protection.

The net loss from operations for the mophie segment totaled ($11,368) for the period ended June 30, 2017, compared to net loss from operations of $(13,756) for the period ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017, and a reduction in expenses related to salaries and professional fees.

2017.

Liquidity and Capital Resources (in thousands)

thousands)

At June 30, 2017,2018, our principal sources of liquidity were cash provided by operations, cash on hand, and the revolving credit facility. Our principal uses of cash have been cash used to reduce accounts payable balances, purchase of property and makefor (1) payments on the term and revolving credit facilities.

facilities, (2) purchases of treasury shares, (3) purchase of property and equipment, and (4) payments for the net share settlement of restricted stock.

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Cash and cash equivalents on-hand increaseddecreased to $14,330$18,582 on June 30, 2017,2018, from $11,604$24,989 on December 31, 2016, an increase2017, a decrease of $2,726.$6,407. The increase in cashnet decrease was largelyprimarily attributable to (1) $17,538 net payments on the resultterm and revolving credit facilities, (2) $3,006 payments for treasury stock, (3) $2,701 from property and equipment purchases, and (4) $2,610 payments for the net share settlement of cash provided by operations from collections on accounts receivable balances and a reduction in inventory; these increases wererestricted stock. These expenditures are partially offset by paydowns of outstanding accounts payable balances, purchases of property plant and equipment and paydowns of debt outstanding. Earnings$19,957 generated from foreign operations are considered permanently re-invested and of the $14,330 cash balance on June 30, 2017, cash from foreign entities totaled $6,186, which constitutes 43% of the total cash and cash equivalents balance.

operating activities.

Accounts receivable, net of allowances, decreased to $72,956$83,990 on June 30, 2017,2018, from $83,835$123,220 on December 31, 2016,2017, a decrease of $10,879.$39,230. The net decrease was dueprimarily attributable to comparatively lower sales for the second quarter of 2018 in comparison to the fourth quarter of 2017, as well as strong cash collections during the first six months of 2017.

ended June 30, 2018.

Inventories decreased to $65,376$69,662 on June 30, 2017,2018, from $72,769$75,046 on December 31, 2016,2017, a decrease of $7,393.$5,384. The net decrease was dueprimarily attributable to a reduction(1) improved operations management of inventory, and (2) seasonal fluctuations in inventory on hand, primarily drivenlevels. These decreases were partially offset by a reductionan increase in mophie-branded inventory.

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inventory levels needed to support the wireless charging product line.

Accounts payable decreased to $62,237$60,372 on June 30, 2017,2018, from $85,022$96,472 on December 31, 2016,2017, a decrease of $22,785.$36,100. The net decrease was dueprimarily attributable to timingcomparatively lower sales for the second quarter of payments2018 in comparison to suppliers to supportthe fourth quarter 2016 sales.

of 2017 with an associated reduction of expenditures during the six months ended June 30, 2018.

At June 30, 2017,2018, the Company had working capital $2,031 compared to negativea positive working capital of ($9,408)$71,316 compared to positive working capital of $43,210 as of December 31, 2016.2017, an increase of $28,106. The net increase in the working capital position was primarily relatedattributable to a reductionreductions in accounts payable and the shift of debt from current portion of long-term debt; the impact of these items were partially offset by a reduction in accounts receivable and inventories.

liabilities to non-current liabilities.

Based on the current level of operations, we believe that cash to be generated from operations, cash on hand, and available borrowings under existing credit arrangements will be adequate to fund expected capital expenditures and working capital needs for the next 12 months.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.

To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial, although there can be no guarantee that these market risks will be immaterial to us.

Item 4.Controls and Procedures

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Under

Our management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the supervisionreports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and withreported within the participation oftime periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures.
At the end of the period covered by this report, we conductedcarried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated underin accordance with the Exchange Act as of June 30, 2017.requirements. Based on thisupon that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered byof this Report,report, our disclosure controls and procedures are not effective due to the material weaknessesweakness described below.

• The Company’s control environment was ineffective because we failed to establish appropriate authorities and responsibilities in alignment with the objectives of internal control over financial reporting to certain employees; and
• The Company’s risk assessment process was ineffective because we failed to consider changes in the business operations and their impact on financial reporting and internal controls.

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Changes in Internal Control over Financial Reporting

As a result of the

To remediate this material weakness relatedwhich resulted in an immaterial misstatement to a material overstatement of net sales, and accounts receivable, cost of goods sold, and inventory as of and for the year ended December 31, 2016, which2017 (which misstatement was corrected by management prior to issuance of the 20162017 consolidated financial statements in the Company’s Annual Report on Form 10-K,10-K), management has initiatedcontinued to implement the following changes to its internal controls during the six months endedas of June 30, 2017:

Conduct training regarding the design and operation2018:
• Test and evaluate the improved control environment related to the appropriateness of authorities and responsibilities of controls with those responsible for performing and reviewing the process level control activities over revenue, accounts receivable and in transit inventory.
Task the ZAGG operations team to identify information technology solutions that streamline the process for tracking and reporting orders shipped from China directly to customers.
Enhance the risk assessment process to consider significant changes in the business operations and the associated impact on financial reporting and internal controls

Although management believes our internal control over financial reporting has been, or is reasonably likelyreporting;

• Test and evaluate the cross functional risk assessment process to be, materiallyidentify and positively affected byassess changes in the changes described above, a material weakness in ourbusiness that could significantly impact internal control over financial reporting continuesreporting;
• Test and evaluate improved control activities over the customer returns process;
• Test and evaluate improved control activities over the management of accounts receivable transactions due to exist asthe growth of the Company; and
• Continue evaluations whether control activities can be automated to replace manual processes.
As of  June 30, 2017. We are in2018, the process of implementingCompany has implemented several new cross functional processes and evaluating these changescontrols to remediateaddress the material weakness.

In addition, others processes and controls are currently being implemented as part of the ongoing remediation.

Inherent Limitations on the Effectiveness of Internal Controls

Our disclosure controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and procedures are designedcompliance and is subject to provide reasonable assurance of achieving their objectives. Nevertheless, an internallapses in judgment and breakdowns resulting from human failures. Internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls are considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controlsover financial reporting also can be circumvented by the individual actscollusion or improper management override. Because of some persons,such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by collusion of two or more people, or by management overrideinternal control over financial reporting. However, these inherent limitations are known features of the internal control. Thefinancial reporting process. Therefore, it is possible to design of any system of controls also is based in part upon certain assumptions aboutinto the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

26
process safeguards to reduce, though not eliminate, this risk.

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PART II - OTHER INFORMATION

Item 1.Legal Proceedings

Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 11,9, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

Item 1A.Risk Factors

Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”), which could materially affect our business, financial condition or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 20162017 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds(dollars and shares in thousands)

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date. The Company’s board of directors also authorized the use of a Rule 10b5-1 plan, which was put into place during the second quarter of 2018.
During the three and six months ended June 30, 2018, the Company repurchased 182 shares of ZAGG Inc common stock for a total consideration of $3,006, which included commissions and processing fees totaling $7. As of June 30, 2018, a total of $14,552 remained authorized under the stock repurchase program.
The shares repurchased during the three months ended June 30, 2018 are as follows:
Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 
April 1 - April 30, 2018 — $— — $17,558 
May 1 - May 31, 2018 — $— — $17,558 
June 1 - June 30, 2018 182 $16.49 182 $14,552 

Item 3.Defaults Upon Senior Securities

Item 3. Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures
Not applicable.


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Item 5.Other Information

Item 5. Other Information
None.

Item 6. Exhibits
a. Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:
Item 6.Exhibits

a.Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:

Exhibit No.NumberDescription of Exhibit
31.1
32.2EX-101.INSCertification of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
EX-101.SCHXBRL Taxonomy Extension Schema Document
EX-101.CALXBRL Taxonomy Extension Calculation Linkbase
EX-101.DEFXBRL Taxonomy Extension Definition Linkbase
EX-101.LABXBRL Taxonomy Extension Labels Linkbase
EX-101.PREXBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

ZAGG INC

ZAGG INC
Date: August 3, 2017/s/ RANDALL L. HALES
Dated: August 1, 2018Randall L. Hales,/s/ CHRIS AHERN
Chris Ahern
Chief Executive Officer President, & Director
(Principal executive officer)

Date:
Dated: August 3, 20171, 2018/s/ BRADLEY J. HOLIDAY
Bradley J. Holiday
Chief Financial Officer
(Principal financial officer)

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